Natural gas liquids

According to the Energy Information Administration, in March the United States produced a “total oil supply” of 10.8 million barrels per day, which was 2.1 mb/d more than in January 2005. But if you just rely on those aggregate numbers, you’ll miss some very important trends.

The EIA’s definition of total oil supply represents the sum of a number of different components. The core is field production of crude oil and lease condensates, the latter being hydrocarbons that are a gas at reservoir temperatures and pressures but that can be separated into liquids at wellhead surface facilities. This core production is represented by the blue region in the graph below. Another category is the refinery processing gain, which results from the fact that the refined products occupy a larger volume than the original crude oil. These two components represented about 3/4 of the total in 2005, but account for only 40% of the 2.1 mb/d increase in the U.S. total supply figure since 2005. A bigger factor in the U.S. increase since 2005 has been natural gas plant liquids (hydrocarbons with a higher energy content than methane which can be separated out from methane at natural gas processing facilities) and other liquids (chiefly biofuels).

Components of total U.S. oil supply, monthly, January 2000 to March 2012, in millions of barrels per day. Blue: crude oil including lease condensates; purple: refinery processing gain; brick: natural gas plant liquids; yellow: other liquids. Data source: EIA.

Natural gas liquids and biofuels historically were a less significant factor in the global oil supply, contributing only 10% to the 2005 total. But they account for almost half of the increase in world production since then.

Components of total world oil supply, monthly, January 2000 to March 2012, in millions of barrels per day. Blue: crude oil including lease condensates; purple: refinery processing gain; brick: natural gas plant liquids; yellow: other liquids. Data source: EIA.

The figure below breaks the U.S. NGL numbers down into specific components. A molecule of ethane has 2 carbon atoms, compared to only one for methane, the basic component in pure natural gas. Although ethane has a higher boiling point and more energy than methane, you’d still have to bring ethane down to a Fahrenheit temperature of 127 degrees below zero to make it a liquid. You can’t drive your car with ethane, and it’s currently almost exclusively used to make ethylene for the chemical industry. The next in molecule size is propane, with 3-carbon molecules and a boiling point of -43^o F. Propane potentially could be used as a transportation fuel, but is currently used primarily for heating and petrochemicals. Ethane and propane between them account for 82% of the increase in U.S. NGL production since 2005.

Components of U.S. natural gas plant liquids production, monthly, January 2000 to April 2012, in thousands of barrels per day.
First panel: ethane-ethylene; second panel: propane and propylene; third panel: normal butane, normal butylene, isobutane, and isobutylene; fourth panel: pentanes and heavier. Note these four values sum to the height of the brick-colored region in Figure 1. Data source: EIA.

Just as the success in producing natural gas in the U.S. has created a huge price differential between crude oil and methane on a BTU basis, the natural-gas byproduct ethane has also now started to tumble in price. That’s important because NGLs have been a key byproduct sustaining the feasibility of natural gas production given the low prices for methane itself. The Wall Street Journal reported last week:

Energy producers struggling with decade-low natural-gas prices have been relying on related fuels such as ethane, propane and butane to remain profitable.

But so many companies have increased drilling of wells with the fuels, known as natural-gas liquids, that their prices are falling as well, creating a new supply-glut problem for the industry and threatening to crimp profits….

Natural-gas liquids revenue last year was about $42 billion, close to natural-gas revenue, which was about $48 billion, according to Tudor Pickering Holt & Co. estimates….

Ethane at the Mont Belvieu, Texas trading hub, a traditional pricing benchmark, sold for 28.4 cents per gallon Tuesday, down from a peak average of 89 cents in October, according to Platts research. Propane at Mont Belvieu sold for 79.65 cents per gallon, down from $1.47 a gallon in October….

No major companies have stopped drilling for natural-gas liquids altogether, but Occidental Petroleum Corp (OXY) Chief Executive Stephen Chazen recently warned that the drop in prices was “troubling” and approaching levels where further production at those rates may not be economically viable.

“If the current low NGL prices continue, cutbacks in liquids-rich wells or gas-rich wells may be necessary,” Mr. Chazen said in a call last month.

Price of ethane. Source: ino.com.

The bottom line is that it doesn’t make sense to think of NGLs as something that you can simply add to traditional crude oil production, either if you’re trying to evaluate the supply and demand situation for oil and gasoline, or if you’re contemplating a personal investment in the stock of a particular oil- or gas-producing company.

U.S. petrochemical companies seem one likely beneficiary of these trends. Drivers of conventional U.S. cars, not so much.